We use cookies to customise content for your subscription and for analytics.If you continue to browse Lexology, we will assume that you are happy to receive all our cookies. For further information please read our Cookie Policy.

Insights from Winston & Strawn

In a study released in January by the Securities and Exchange Commission ("SEC"), the SEC concluded that it did not have sufficient resources to conduct effective examinations of registered investment advisers. As reported in an earlier issue of this Update, the study proposed three possibilities: (1) the SEC could continue to be the sole monitor of registered investment advisers, which would require the SEC to supplement its federal funding with user fees; (2) one or more self-regulatory organizations ("SROs") could be created to regulate registered investment advisers; or (3) the Securities Exchange Act of 1934 could be amended to allow FINRA to supervise registered investment advisers.

In response to this study, an unlikely group has stepped up to address the concerns expressed by the SEC. A group of law students at the University of Mississippi School of Law have begun the process of establishing an SRO to supervise certain registered investment advisers, by creating an organization named the "Self-Regulatory Organization for Independent Investment Advisers," or "SROIIA." The law students initiating this effort are members of the law school's Business Law Society and they plan to launch a national survey of investment advisers to gauge what investment advisers would like to see in an SRO. SROIIA would target independent registered investment advisers, not those affiliated with broker-dealers. Should the students succeed in establishing this SRO, their aim is to inspect 100 percent of its members each year, with a focus on assisting advisers with compliance rather than focusing on deficiencies.

The students face a number of obstacles, including the need to raise millions of dollars and a lack of experience. To combat the latter, the students are inviting investment advisers and other experienced professionals to provide advice and to serve on the board of SROIIA. In addition to the lack of funding and experience, for SROIIA to become an SRO able to supervise registered investment advisers, Congress would need to amend the Advisers Act of 1940 and the SEC would need to recognize SROIIA. Beyond the logistical hurdles SROIIA faces, FINRA has expressed an interest in acting as the overseer of registered investment advisers. In early March, FINRA's Chief Executive, Richard Ketchum, told the SEC that FINRA is willing and able to act as the supervisor for investment advisers, noting that FINRA already has infrastructure and expertise. However, the Investment Adviser Association ("IAA") has expressed opposition to the idea of FINRA monitoring registered investment advisers. The IAA instead endorses user fees imposed by the SEC and continued oversight by the SEC rather than the creation of an SRO or supervision by FINRA. FINRA has welcomed SROIIA's participation in supervising registered investment advisers and noted that it had envisioned several authorized SROs assisting the SEC in its monitoring of registered investment advisers and protecting investment adviser customers.